Customer Acquisition · Equity

First SaaS Customer Wants Equity

Jordan Meyer Cofounder@Stride, Added$1BN in BD rev@Younique, @BYUStrategy

February 3rd, 2020

Hi, my co-founder and I are building a SaaS business for we call the B2Side Hustle market (even smaller than SMB) We have several paying customers right now in a month of full time work.

We were approached by a company that would give us access to about 20,000 paying customers. However, they want equity and a lot of product control in exchange for being that first large customer. They have proposed funding the company in exchange for 51%. We haven't yet talked about what "funding" the company means. 51% seems like a lot of dilution out of the gate. It's clear they want a lot of control over product direction. I worry about being held hostage to them and never being able to truly take the product to market.

How would you think about this question?

Paul Garcia marketing exec & business advisor

February 8th, 2020

If that's their approach, my question would be why they don't just buy the entire thing from you and you can go do something else? Or you could become an employee. But it sounds a little like they want your work/IP for cheap. I have no idea what they're offering in return.

Alternately, why can't you simply have a referral program. You can share revenue on the customers they direct your way, but they just make money and have no input.

I'm curious why they think they need product control. Really, if they want control they should either buy it outright and turn you into an employee, or buy it and let someone else run it who doesn't have a stake.

Maybe I'm wrong on all counts. I just hope they're not full of hot air and mess you up by dangling a carrot on which they don't deliver.

Edward de Jong Software designer and developer, programming language designer

Last updated on March 7th, 2020

Whomever possesses 51% controls the entire company. If you have 49% and the other guy has 51%, by majority rule you can be fired at any moment. Can this company actually deliver 20,000 paying customers? If so, that might make you a wealthy man, so you could structure a deal where the equity is proportional to sales targets met by them. If they reach $20 million a year in revenue, by all means give them control, as long you have a long term contract and make a very clean contract that protects you against termination. A lot of the golden parachute contracts that executives write ensure that if they are sacked they get a huge payday. The greatest such contract in history was that for Michael Ovitz, who was hired by Eisner to take over Disney, but was fired a few months later as he couldn't do the job at all, and his payout was around 109 million... not bad for failing miserably. Getting a lot of customers is more than 50% of the effort of building a company. In many startups they spend 80% on sales and marketing before reaching profitability. But most sales people promise the moon and deliver a pizza... so you must have very firmly defined revenue targets. Don't for example insist on 20,000 customers; you could get 20,000 people who are paying 1 cent a month... that won't do you any good. You have to imagine when drafting these agreements every possible thing a devious person could do to trick you. America is only a medium honest country, and it is a popular sport to trick entrepreneurs who are way better at designing and building a great new product than writing agreements. That is why the VC's are billionaires and most founders are not.